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Edited Transcript of CFMS earnings conference call or presentation 1-May-19 8:30pm GMT

Q1 2019 Conformis Inc Earnings Call

Bedford May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of ConforMIS Inc earnings conference call or presentation Wednesday, May 1, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark A. Augusti

Conformis, Inc. - CEO, President & Director

* Paul S. Weiner

Conformis, Inc. - CFO & Treasurer

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Conference Call Participants

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* K. Gong

JP Morgan Chase & Co, Research Division - Analyst

* Stanislav Nykola Fediuk

SunTrust Robinson Humphrey, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon. My name is Sarah. I will be your conference operator today. At this time, I would like to welcome everyone to Conformis First Quarter 2019 Earnings Conference Call. (Operator Instructions)

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities law, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be considered to be forward-looking statements.

All forward-looking statements include without limitation statements about Conformis' strategy, future operations, future financial positions and results, gross margin, product margin, operating trends, financial guidance, market growth, total revenue and revenue mix by products and geography. The anticipated timing of limited launch of our hip product offering, the potential impact and advantages of using customized implants, business initiatives and transitions in our commercial operations are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the Risk Factors section of Conformis' public filings with the Securities and Exchange Commission. Accordingly, you should not place undue reliance on the forward-looking statements. While Conformis may elect to update these forward-looking statements at some point in the future, Conformis disclaims any obligation, except as required by law, to update or revise any financial projections and forward-looking statements whether because of new information, future events or otherwise.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 1, 2019.

I would now like to turn the call over to Mark Augusti, the company's President and Chief Executive Officer. Mark?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [2]

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Thank you, Sarah, and welcome, everyone, to Conformis' First Quarter 2019 Earnings Conference Call. With me on the call today is our CFO, Paul Weiner. During the call, Paul and I will share our prepared remarks on a variety of topics, including our first quarter financial and operating performance. Following the prepared remarks, Paul and I look forward to answering your questions.

From a commercial perspective, we had a nice performance in the U.S. delivering 10% growth for the second consecutive quarter. Our international business, however, continues to decline. Operationally, our gross margin improvement decelerated in Q1 as we realized 48% gross margin. While this was an improvement of 300 basis points over prior year, it was a sequential decline quarter-to-quarter that was due primarily to 3 issues. Operational challenges in the final phase of outsourcing our CAD services, the impact of hip commercial readiness planning and the onetime charge from our SLS 3D printer maintenance supplier. We anticipated limited sequential gross margin improvement in Q2 compared to Q1 as these impacts roll off production.

As announced on December 13, we took significant actions in fourth quarter of last year that were intended to optimize sales, marketing and administrative expense to achieve operational efficiencies, sharper focus on new product development by prioritizing product segments with higher-growth opportunities, continue opportunistic international expansion and streamline personnel to create a more focused organization. I'm pleased to report that these actions resulted in a $4.8 million or 23% expense reduction in Q1 over prior year. Importantly, this released our overall cash outflow during the quarter to $5 million versus $9.3 million in the prior year.

Let me now turn the call over to Paul for a more detailed financial review of our performance. Paul?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [3]

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Thank you, Mark, and thank you all for joining us. We reported first quarter revenue of $20.6 million, representing an increase of 5% or $1 million year-over-year on a reported basis. Excluding the negative impact of changes in foreign currency exchange rates of $169,000, revenue increased 6% on a constant currency basis. Revenue in the first quarter of 2019 and 2018 includes royalty revenue of $175,000 and $173,000, respectively, related to a patent license agreement.

First quarter product revenue was $20.5 million, representing an increase of $986,000 or 5% year-over-year on a reported basis and 6% on a constant currency basis.

Sales of iTotal PS increased $1.7 million to $7.5 million or 29% year-over-year on a reported and constant currency basis. Sales of the iTotal CR, iDuo and iUni declined $1.2 million to $12.4 million or 9% year-over-year on a reported basis and 8% on a constant currency basis. iTotal PS represented approximately 37% of total product revenue in the first quarter of 2019 compared to approximately 30% for the same quarter last year.

With the limited launch beginning in the third quarter of 2018, Conformis hip sales were approximately $500,000 in the first quarter of 2019. U.S. product revenue increased $1.5 million to $17.6 million or 10% year-over-year. U.S. product revenue was driven by sales of our iTotal PS, which increased 30% year-over-year, offset by a 5% year-over-year decrease in sales of the base business product lines. First quarter U.S. product revenue represented 86% of total product revenue compared to 82% for the same quarter last year. Rest of World product revenue was $2.9 million, a decrease of $541,000 or 16% year-over-year on a reported basis and 11% on a constant currency basis. Rest of World product revenue was affected primarily by reimbursement challenges in Germany.

Turning to a review of our results across the rest of the P&L. First quarter gross margin was 48% of revenue compared to 45% of revenue last year, a 300 basis point increase. The gross margin improvement was driven by cost reductions as a result of vertical integration and manufacturing efficiencies. During the year-end earnings call in February, we gave direction on our gross margin expectations for 2019. We stated that we are in the final stages of offshoring our software design manufacturing team to India at a much reduced cost. We also stated that we encouraged them short-term manufacturing costs during this transition, which we believe, are now resolved. Due to this, we indicated that we expect our gross margin to remain relatively flat to the fourth quarter of 2018 through the first half of 2019, and return to expanding our gross margin in the second half of the year. In addition, we also had a $230,000 charge or approximately 100 basis points of gross margin in the first quarter related to 2018 3D printer maintenance cost.

Total operating expenses decreased $4.8 million to $16.4 million or 23% year-over-year. This decrease in expenses was driven primarily by reductions in personnel costs, marketing programs, administrative expenses and patent litigation expense. All as part of a plan announced at the end of 2018 to reduce cash burn beginning in 2019. Personnel cost in sales and marketing was reduced as a result of the reduction in a number of sales managers, conversion of a number of direct reps to independent agents and reduction of certain marketing programs. Personnel costs in research and development was reduced mainly due to the completion of certain software and product development projects in 2018. Additionally, patent litigation expense was reduced due to the patent infringement settlement with Smith & Nephew.

Net loss was $7.6 million or $0.12 per share compared to net loss of $12 million or $0.22 per share for the same period last year. Net loss per basic share calculations assumed weighted average basic shares outstanding of 62.8 million for the first quarter of 2019 compared to 54.7 million for the same period last year. Net loss in the first quarter included foreign currency exchange expense of $653,000 compared to foreign currency exchange income of $1.1 million in the same period last year.

We had cash and cash equivalents and investments totaling $18.6 million as of March 31, 2019, compared to $23.6 million as of December 31, 2018. We were successful in reducing our overall cash outflow during the quarter to $5 million versus approximately $9 million to $10 million in each of the quarters last year, excluding last year's financing and the patent litigation settlement.

We continue to target 2019 year-over-year product revenue growth in the 4% range. We did exceed this growth rate in the first quarter. Based on orders received to date, we expect about 1% to 2% year-over-year product revenue growth in the second quarter and target 4% year-over-year product revenue growth for the remainder of the year.

With that, let me turn the call back over to Mark.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [4]

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Thank you, Paul. As Paul just mentioned, we expect a slower Q2 top line growth performance due to continued OUS pressure and a slowdown of U.S. iTotal CR demand, partly in light of the cementless segment growth. However, we remain confident that our new product pipeline should provide opportunity for above-market growth in 2020.

We continue to invest in clinical research and are pleased to report that publication, what is the possible impact of high variability of distal femoral geometry on TKA? A CT data analysis of 24,042 knees in the prestigious peer-reviewed journal CORR, Clinical Orthopaedics and Related Research. This study which was funded by Conformis looked at the anatomy of over 24,000 knee patients. The results of this study quantified high degree of anatomic variability within the study population in both distal and posterior femoral offsets which supports the adoption of customized implant systems for a significant number of patients. As the lead author, Professor Johannes Beckmann of the Sportklinik Stuttgart out of Stuttgart, Germany stated, "Our results demonstrate the wide variability of knee anatomy among the general population. One of the biggest challenges we face as knee surgeons is to make off-the-shelf implants fit into disparate patient anatomies. The data clearly shows that standard OTS implants, which come in fixed sizes and geometries do not typically match that variability." Importantly, in comparing with the PSI's offerings, the study determined that a size of its match of greater than 3 millimeters would occur with OTS implants in at least 1/3 of the patients reviewed. A link to this full study can be found on Conformis' website.

In the coming quarters, we expect to be able to report out even more results and publications of our clinical efforts, so stay tuned.

That's all the comments I have for now. Paul and I look forward to answering any questions you may have about our Q1 results. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Robbie Marcus with JPMorgan.

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K. Gong, JP Morgan Chase & Co, Research Division - Analyst [2]

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This is actually Allen on for Robbie. I just have one quick question and then maybe a follow-up after. But starting with your guidance of 1% to 2% for 2Q, I'm guessing that's constant currency. But then for the 4% that you said for the balance of the year, is that what, like, kind of guidance for 3Q, 4Q? Or do you just mean that full year will be around that 4% number?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [3]

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A little bit of both. So yes, we're talking about third and fourth quarter coming it at around 4% as well as continue to target for the full year at 4%.

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K. Gong, JP Morgan Chase & Co, Research Division - Analyst [4]

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Got it. And then like just a question kind of about market dynamics. Like, obviously, robotics have been kind of sucking all the air out of the room. And now Zimmer is launching their own robotic system granted in kind of a limited rollout. What kind of impact do you think that has on the value proposition you're trying to bring? Like, do you think that will have a meaningful impact on your business now that there are 2 competitors trying to kind of push for robotic systems?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [5]

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Yes, Allen, that's a great question. This is Mark. Look, we've been fielding in a market that's been talking robotics for a long time, and I've always stated in the past and I continue to believe, I actually enjoyed the discussion because it says, you are looking for better outcomes. You're thinking about how you're getting improvement in your practice, marketing, those types of things potentially. And we do all of that at Conformis. And in particular, we are well suited for the outpatient and the ASC setting. So I think there's a lot of good things. We don't have it specifically quantified clearly. I think when you combine robotics and the move towards cementless, there's opportunity for the bigger market players to really drive price appreciation among your own customers. And I think that's why our cementless product is important. But in general, I think, we're well situated to handle it. We'll probably have a couple of cases that may come to my attention where there's some experimentation, but I feel confident that our sales force has been dealing with this for a while, and we'll be able to handle it.

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Operator [6]

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Our next question comes from the line of Steven Lichtman with Oppenheimer & Co.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [7]

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Steve?

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Unidentified Analyst, [8]

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Hello.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [9]

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Yes. We're here.

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Unidentified Analyst, [10]

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It's [Mir Amir] filling in for Steve. Can you guys hear me?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [11]

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Yes.

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Unidentified Analyst, [12]

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Okay. So my first question was, can you guys walk through your latest thoughts in terms of geographic expansion, potentially outside of Germany, a bit more, if you can touch on that?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [13]

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Yes. We continue to do procedures in Australia and pursue that. We have done -- recently expanded in Europe. So first cases in kind of Spain and the Netherlands as well as I'm pleased to report that this week we did cases in UAE as well as we did cases in Italy. So we've opened up both those markets with distribution and by our reports, they went well. So it's important to put it in context. But it is an important goal because as we -- granted the OUS business, specifically in Germany, continues to decline, it's hopefully going to decline at a slower rate and by opening up other markets even to get smaller incremental business it will help offset that. So [Mir], it's an important part of our strategy. I appreciate the question.

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Unidentified Analyst, [14]

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Great. And just one more question in terms of, how do you guys expect to grow your U.S. sales rep fee on the Street in 2019? And I think you guys touched on it a little earlier, but if you could just provide a bit more color on that.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [15]

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Yes. So we definitely plan to grow -- targeting to grow 10%, that's our goal. And we hope to see increased activity in that because we are pleased to report that in our proxy we had put forth a specific equity plan that we can make available to distributors and agents. And pleased to report that, that proposal passed. I believe it was proposal number 2. So look to hear more for that going forward. We're going to use it judiciously, but that is the plan, is to do that. And if you recall, in the past, I said we've been challenged on that because we've been a 1-product company. So we're still in limited launch but of our hip, but by having the hip, now by having the ability to offer some equity participation, we think we're continuing to demonstrate great results with our knee. We would like to think that we will able to add quality distribution in the U.S. over the upcoming quarters.

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Operator [16]

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Our next question comes from the line of Robbie Marcus. Our next question comes from the line of Bruce Nudell.

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Stanislav Nykola Fediuk, SunTrust Robinson Humphrey, Inc., Research Division - Associate [17]

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This is Stan Fediuk on the line of Bruce Nudell. Just looking at your R&D expense, it came in lower than we expected. Can you just comment on that line item and how we should think about it going forward for the rest of the year?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [18]

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Yes. So that did come in a little lower than we had expected too. It's more of timing as far as when we're bringing in and thank for consultants and some of the other work along the way, prototyping. So we do expect to still stay on the targeted numbers that we had provided earlier. This is more of a timing for the first quarter.

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Stanislav Nykola Fediuk, SunTrust Robinson Humphrey, Inc., Research Division - Associate [19]

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Got it. And just out of curiosity, what is the current just in time delivery capability? So when from the time that physician places an order for, let's say a knee or a hip to when they deliver it for U.S. and OUS. I believe previously it was 6 weeks. Is that still the same?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [20]

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Yes. For the knee, with the order -- the surgeon is ordering an iTotal CR or a partial, it's 5 weeks in the United States and an extra week, 6 weeks internationally. And for the iTotal PS, it's 6 weeks in the U.S., an additional week internationally. For the hip, it's 8 weeks, and we only sell the hip in the U.S.

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Operator [21]

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Our next question comes from the line of Josh Jennings with Cowen.

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Unidentified Analyst, [22]

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(technical difficulty)

on for Josh. So first one, curious what's been the early feedback with iHip ahead of the upcoming full launch with your self-launch customers? And at AAOS? And curious if based on that feedback, if you still believe, surgeons will be receptive to a price point that's had a premium to off-the-shelf implants?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [23]

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I'm sorry, I didn't get the first part of the question. But it sounds like you're asking about the price premium. So we don't comment specifically on price. But we've actually been pretty pleased that the ability to contract and contract at our target prices. And to be clear, we do get a bit of a premium. But it's more in the single-digit, maybe low double-digit, kind of, premium, if we get it. Some places, we don't. I mean as you know pricing is variable. I just say that because there are people who think we're 2, 3, 4x kind of standard implants and that's not the case. We actually are really pleased that being able to hit an acceptable price target and offering, we think it's early days because we're still in limited release, but offering a better clinical solution and operative experience for our physicians.

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Unidentified Analyst, [24]

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Got it. And second question, you made some remarks on the positive CORR publication. How meaningful of an impact do you expect clinical data will be achieved, kind of, reaccelerating your top line and can you also remind us of any important upcoming data sets or publications that you expect in the near term?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [25]

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Yes. I can a little bit. So first off, I think, it's important to continue to reinforce the quality of our data and the quality performance that we have. And I think if you look at some of the literature and latest thinking in knees, there is this realization, and there is a number of studies that rotational errors in overhanging and underhanging are mismatches of 3 millimeters or greater do translates to patient dissatisfaction in particular, functional deficits either in stability or in just daily & activities. And so I think that's going to become important because we really don't have that. I mean we've got our own studies that we've funded and show this, and we've got another one that has come out, and we're going to talk more about that next quarter. Because I try to talk about these in the quarter. They're actually published. But we got stuff around that.

We also have seen the industry and the clinicians that do research in the industry unrelated to Conformis are showing these anatomical mismatches. So we think it's important to demonstrate this. We think it's important to continue to advocate where we can do well. And this paper if you read it, it just sort of really starts to make sense. And so we'll continue to use that as we can to help advocate for better match from the physicians' standpoint and targeting, what I think will be the responders and the better patients in their clinical practice that can be better from a Conformis therapy.

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Operator [26]

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(Operator Instructions) Thank you. And this concludes today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.